International Economics: Theory & Policy -...

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International Trade Theory

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International Economics: Theory & Policy, Eighth Edition, by Paul R. Krugman and Maurice Obstfeld. Copyright © 2009 by Paul R. Krugman and Maurice Obstfeld. Published by Addison-Wesley.

12

World Trade: An Overview

In 2007, the world as a whole produced goods and services worth about $50trillion at current prices. Of this total, more than 30 percent was sold acrossnational borders: World trade in goods and services exceeded $16 trillion.

There’s a whole lot of exporting and importing going on.In later chapters we’ll analyze why countries sell much of what they produce

to other countries and why they purchase much of what they consume from othercountries. We’ll also examine the benefits and costs of international trade and themotivations for and effects of government policies that restrict or encouragetrade. Before we get to all that, however, it’s helpful to have a sense of who tradeswith whom, what they sell to each other, and the kinds of goods and services thatare traded internationally—especially because the pattern of world trade haschanged dramatically over the past few decades.

We begin by describing who trades with whom. An empirical relationshipknown as the gravity model helps to make sense of the value of trade betweenany pair of countries and also sheds light on the impediments that continue tolimit international trade even in today’s global economy.

We then turn to the changing structure of world trade. As we’ll see, recentdecades have been marked by a large increase in the share of world output thatis sold internationally, by a shift in the world’s economic center of gravitytoward Asia, and by major changes in the types of goods that make up that trade.

Learning Goals

After reading this chapter, you will be able to:

• Describe how the value of trade between any two countries depends onthe size of these countries’ economies and explain the reasons for thatrelationship.

• Discuss how distance and borders reduce trade.• Describe how the share of international production that is traded has

fluctuated over time and why there have been two ages of globalization.• Explain how the mix of goods and services that are traded internationally

has changed over time.

2Chapter

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CHAPTER 2 World Trade: An Overview 13

Total trade,$ billion

Canada

Mexico

China

Japan

Germany

United Kingdom

South Korea

Taiwan

France

Malaysia

0 50 100 150 200 250 300 350 400 450 500

Figure 2-1Total U.S. Trade with Major Partners, 2006

U.S. trade—measured as the sum of imports and exports—is mostly with 10 major partners.

Source: U.S. Department of Commerce.

Who Trades with Whom?Figure 2-1 shows the total value of trade in goods—exports plus imports—between theUnited States and its top 10 trading partners in 2006. (Data on trade in services are lesswell broken down by trading partner; we’ll talk about the rising importance of trade inservices, and the issues raised by that trade, later in this chapter.) Taken together, these10 countries accounted for 68 percent of the value of U.S. trade in that year.

Why did the United States trade so much with these countries? Let’s look at the factorsthat, in practice, determine who trades with whom.

Size Matters: The Gravity ModelThree of the top 10 U.S. trading partners are European nations: Germany, the UnitedKingdom, and France. Why does the United States trade more heavily with these threeEuropean countries than with others? The answer is that these are the three largestEuropean economies. That is, they have the highest values of gross domestic product(GDP), which measures the total value of all goods and services produced in an economy.There is a strong empirical relationship between the size of a country’s economy and thevolume of both its imports and its exports.

Figure 2-2 illustrates that relationship by showing the correspondence between the sizeof different European economies—specifically, the 15 countries that were members ofthe European Union (EU) in 2003—and their trade with the United States in that year. Onthe horizontal axis is each country’s GDP, expressed as a percentage of the total GDP ofthe European Union; on the vertical axis is each country’s share of the total trade of theUnited States with the EU. As you can see, the scatter of points clustered around the dotted

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14 PART ONE International Trade Theory

20

00 20 255 10 15

15

10

5

25

Percent of U.S.trade with EU

Percent of EU GDP

Ireland

Belgium

Netherlands

SpainSweden

United Kingdom

France

Germany

Italy

Figure 2-2The Size of European Economies,and the Value of Their Trade withthe United States

Source: U.S. Department of Commerce,European Commission.

45-degree line—that is, each country’s share of U.S. trade with Europe—was roughlyequal to that country’s share of European GDP. Germany has a large economy, accountingfor 22.9 percent of European GDP; it also accounts for 23.4 percent of U.S. trade with theEU. Sweden has a much smaller economy, accounting for only 2.9 percent of EuropeanGDP; correspondingly, it accounts for only 3.3 percent of U.S.–EU trade.

Looking at world trade as a whole, economists have found that an equation of thefollowing form predicts the volume of trade between any two countries fairly accurately,

Tij � A � Yi � Yj/Dij (2-1)

where A is a constant term, Tij is the value of trade between country i and country j, Yi iscountry i’s GDP, Yj is country j’s GDP, and Dij is the distance between the two countries.That is, the value of trade between any two countries is proportional, other things equal, tothe product of the two countries’ GDPs, and diminishes with the distance between the twocountries.

An equation such as (2-1) is known as a gravity model of world trade. The reason forthe name is the analogy to Newton’s law of gravity: Just as the gravitational attractionbetween any two objects is proportional to the product of their masses and diminishes withdistance, the trade between any two countries is, other things equal, proportional to theproduct of their GDPs and diminishes with distance.

Economists often estimate a somewhat more general gravity model of the followingform:

(2-2)Tij = A * Yia * Yjb/Dijc

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TABLE 2-1 Hypothetical World Spending Shares and GDP

Percentage Share of Country World Spending GDP ($ trillion)

A 40 4B 40 4C 10 1D 10 1

This equation says that the three things that determine the volume of trade between twocountries are the size of the two countries’ GDPs and the distance between thecountries, without specifically assuming that trade is proportional to the product ofthe two GDPs and inversely proportional to distance. Instead, a, b, and c are chosen tofit the actual data as closely as possible. If a, b, and c were all equal to 1, this would bethe same as Equation (2-1). In fact, estimates often find that (2-1) is a pretty goodapproximation.

The Logic of the Gravity ModelWhy does the gravity model work? Broadly speaking, large economies tend to spend largeamounts on imports because they have large incomes. They also tend to attract large sharesof other countries’ spending because they produce a wide range of products. So the tradebetween any two economies is larger, the larger is either economy.

Can we be more specific? A highly simplified numerical example helps to explain whytrade between any two countries is roughly proportional to the product of their GDPs.

Let’s start by observing that a country’s GDP, because it is equal to the value of thegoods and services it sells, is, by definition, equal to total spending on the goods andservices it produces. It follows that a country’s share of world GDP is equal to theshare of total world spending that is spent on its products. For example, in 2007 theUnited States accounted for about 25 percent of world GDP; that tells us that in 2007,25 percent of world spending was devoted to goods and services produced in theUnited States.

Now let’s make a provisional assumption: that everyone in the world spends his orher income in the same proportions. That is, if the United States receives 25 percent ofworld spending, the reason is that everyone in the world spends 25 percent of his or herincome on U.S.-produced goods and services. This assumption obviously isn’t true inthe real world: In reality, U.S. residents spend a much higher fraction of their incomeon U.S. products than do the residents of other countries. But bear with us for amoment.

Our next step is to create an imaginary world consisting of four countries, whichwe’ll call A, B, C, and D. Table 2-1 shows each country’s share of world spending:We assume that A and B are big economies, which each receive 40 percent of worldspending, while C and D are small economies, each receiving 10 percent of worldspending. Also, suppose that total world spending is $10 trillion; then, as also shown inTable 2-1, A and B will each have GDPs of $4 trillion, while C and D will have GDPsof $1 trillion each.

But a nation’s GDP, the value of the goods and services it sells, is also its income. So ifA spends all of its income, it will have total spending of $4 trillion, as will B. C and D willspend $1 trillion each.

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TABLE 2-2 Values of Exports ($ trillion)

To: A B C D

A — 1.6 0.4 0.4B 1.6 — 0.4 0.4C 0.4 0.4 — 0.1D 0.4 0.4 0.1 —

We can now construct a table, Table 2-2, showing world trade. To understand Table 2-2,bear in mind that country A has an income of $4 trillion and spends 40 percent of thatincome on goods and services produced in B. So the value of exports from B to A is $1.6trillion. All the other entries in the table are filled in the same way.

Now for the punchline: The trade pattern shown in Table 2-2 exactly fits a gravitymodel. Exports from country i to country j are equal to 0.1 � GDPi � GDPj. Clearly, thisexample is greatly oversimplified, but it does help to explain why trade between twocountries is roughly proportional, other things equal, to the product of their GDPs.

What other things aren’t equal? As we have already noted, in practice countries spendmuch or most of their income at home. The United States and the European Union eachaccount for about 25 percent of the world’s GDP, but each attracts only about 2 percent ofthe other’s spending. To make sense of actual trade flows, we need to consider the factorslimiting international trade. Before we get there, however, let’s look at an important reasonwhy the gravity model is useful.

Using the Gravity Model: Looking for AnomaliesIt’s clear from Figure 2-2 that a gravity model fits the data on U.S. trade with Europeancountries pretty well but not perfectly. In fact, one of the principal uses of gravity modelsis that they help us to identify anomalies in trade. Indeed, when trade between two coun-tries is either much more or much less than a gravity model predicts, economists search forthe explanation.

Looking again at Figure 2-2, we see that the Netherlands, Belgium, and Ireland tradeconsiderably more with the United States than a gravity model would have predicted. Whymight this be the case?

For Ireland, the answer lies partly in cultural affinity: Not only does Ireland share alanguage with the United States, but tens of millions of Americans are descended fromIrish immigrants. Beyond this consideration, Ireland plays a special role as host to manyU.S.-based corporations; we’ll discuss the role of such multinational corporationsin Chapter 7.

In the case of both the Netherlands and Belgium, geography and transport costs prob-ably explain their large trade with the United States. Both countries are located near themouth of the Rhine, Western Europe’s longest river, which runs past the Ruhr,Germany’s industrial heartland. So the Netherlands and Belgium have traditionally beenthe point of entry to much of northwestern Europe; Rotterdam in the Netherlands is themost important port in Europe, as measured by the tonnage handled, and Antwerp inBelgium ranks second. The large trade of Belgium and the Netherlands suggests, inother words, an important role of transport costs and geography in determining thevolume of trade. The importance of these factors is clear when we turn to a broaderexample of trade data.

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100

20

00 5 2510 15 20

80

60

40

120

Percent of U.S.trade with EU

Percent of EU GDP

Mexico

Canada

European countries

Figure 2-3Economic Size and Tradewith the United States

The United States does markedlymore trade with its neighbors thanit does with European economiesof the same size.

Source: U.S. Department of Commerce,European Commission.

Impediments to Trade: Distance, Barriers, and BordersFigure 2-3 shows the same data as Figure 2-2—U.S. trade as a percentage of total tradewith the European Union, versus GDP as a percentage of total EU GDP—but adds twomore countries: Canada and Mexico. As you can see, the two neighbors of the UnitedStates do a lot more trade with the United States than European economies of equal size. Infact, Canada, whose economy is roughly the same size as Spain’s, trades as much with theUnited States as all of Europe does.

Why do the United States’ North American neighbors trade so much more with theUnited States than its European partners? One main reason is the simple fact that Canadaand Mexico are closer.

All estimated gravity models show a strong negative effect of distance on internationaltrade; typical estimates say that a 1 percent increase in the distance between two countriesis associated with a fall of 0.7 to 1 percent in the trade between those countries. This droppartly reflects increased costs of transporting goods and services. Economists also believethat less tangible factors play a crucial role: Trade tends to be intense when countries haveclose personal contact, and this contact tends to diminish when distances are large. It’seasy for a U.S. sales representative to pay a quick visit to Toronto; it’s a much biggerproject for that representative to go to Paris, and unless the company is based on the WestCoast, it’s an even bigger project to visit Tokyo.

In addition to being U.S. neighbors, Canada and Mexico are part of a trade agreementwith the United States, the North American Free Trade Agreement, or NAFTA, which ensuresthat most goods shipped among the three countries are not subject to tariffs or other barriers to

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international trade. We’ll analyze the effects of barriers to international trade in Chapter 8, andthe role of trade agreements such as NAFTA in Chapter 9. For now, let’s notice that one use ofgravity models is as a way of assessing the impact of trade agreements on actual internationaltrade: If a trade agreement is effective, it should lead to significantly more trade among itspartners than one would otherwise predict given their GDPs and distances from one another.

While trade agreements often end all formal barriers to trade between countries, theyrarely make national borders irrelevant. Recent economic research has shown that evenwhen most goods and services shipped across a national border pay no tariffs and face fewlegal restrictions, there is much more trade between regions of the same country thanbetween equivalently situated regions in different countries. The Canadian-U.S. border is acase in point. The two countries are part of a free trade agreement (indeed, there was aCanadian-U.S. free trade agreement even before NAFTA); most Canadians speak English;and the citizens of either country are free to cross the border with a minimum of formali-ties. Yet data on the trade of individual Canadian provinces both with each other and withU.S. states show that, other things equal, there is much more trade between provinces thanbetween provinces and U.S. states.

Table 2-3 illustrates the extent of the difference. It shows the total trade (exports plusimports) of the Canadian province of British Columbia, just north of the state ofWashington, with other Canadian provinces and with U.S. states, measured as a percentageof each province or state’s GDP. Figure 2-4 shows the location of these provinces andstates. Each Canadian province is paired with a U.S. state that is roughly the same distancefrom British Columbia: Washington State and Alberta both border British Columbia;Ontario and Ohio are both in the Midwest; and so on. With the exception of trade with thefar eastern Canadian province of New Brunswick, intra-Canadian trade drops off steadilywith distance. But in each case the trade between British Columbia and a Canadianprovince is much larger than trade with an equally distant U.S. state.

Economists have used data like those shown in Table 2-3, together with estimates of theeffect of distance in gravity models, to calculate that the Canadian-U.S. border, although itis one of the most open borders in the world, has as much effect in deterring trade as if thecountries were between 1,500 and 2,500 miles apart.

Why do borders have such a large negative effect on trade? That is a topic of ongoingresearch. Chapter 20 describes one recent focus of that research: an effort to determinehow much effect the existence of separate national currencies has on international trade ingoods and services.

TABLE 2-3 Trade with British Columbia, as Percent of GDP, 1996

U.S. State atCanadian Trade as Trade as Similar Distance Province Percent of GDP Percent of GDP from British Columbia

Alberta 6.9 2.6 WashingtonSaskatchewan 2.4 1.0 MontanaManitoba 2.0 0.3 CaliforniaOntario 1.9 0.2 OhioQuebec 1.4 0.1 New YorkNew Brunswick 2.3 0.2 Maine

Source: Howard J. Wall, “Gravity Model Specification and the Effects of the U.S.-Canadian Border,”Federal Reserve Bank of St. Louis Working Paper 2000–024A, 2000.

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U.S. States1. Washington2. Montana3. California4. Ohio5. New York6. Maine

1

0 1 2 3

45

62

34

56

Canadian Provinces0. British Columbia1. Alberta2. Saskatchewan3. Manitoba4. Ontario5. Quebec6. New Brunswick

Figure 2-4Canadian Provinces and U.S. States That Trade with British Columbia

The Changing Pattern of World TradeWorld trade is a moving target. The direction and composition of world trade is quitedifferent today from what it was a generation ago, and even more different from what itwas a century ago. Let’s look at some of the main trends.

Has the World Gotten Smaller?In popular discussions of the world economy, one often encounters statements that moderntransportation and communications have abolished distance, that the world has become asmall place. There’s clearly some truth to these statements: The Internet makes instant andalmost free communication possible between people thousands of miles distant, while jettransport allows quick physical access to all parts of the globe. On the other hand, gravitymodels continue to show a strong negative relationship between distance and internationaltrade. But have such effects grown weaker over time? Has the progress of transportationand communication made the world smaller?

The answer is yes—but history also shows that political forces can outweigh the effectsof technology. The world got smaller between 1840 and 1914, but it got bigger again formuch of the 20th century.

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60

50

40

20

10

01830

30

Trade as apercent of GDP

1870 1910 1950 1995

U.K. U.S.

Figure 2-5The Rise, Fall, and Rise of International Trade Since 1830

Source: Richard E. Baldwin and Phillipe Martin, “Two Waves of Globalization: SuperficialSimilarities, Fundamental Differences,” in Horst Siebert, ed., Globalization and Labor(Tubingen: Mohr, 1999).

Economic historians tell us that a global economy, with strong economic linkagesbetween even distant nations, is not new. In fact, there have been two great waves ofglobalization, with the first wave relying not on jets and the Internet but on railroads,steamships, and the telegraph. In 1919, the great economist John Maynard Keynesdescribed the results of that surge of globalization:

What an extraordinary episode in the economic progress of man that age was whichcame to an end in August 1914! . . . The inhabitant of London could order by telephone,sipping his morning tea in bed, the various products of the whole earth, in such quantityas he might see fit, and reasonably expect their early delivery upon his doorstep.

Notice, however, Keynes’s statement that the age “came to an end” in 1914. In fact, twosubsequent world wars, the Great Depression of the 1930s, and widespread protectionismdid a great deal to depress world trade. Figure 2-5 shows total trade as a percentage of GDPfor the United Kingdom and the United States for selected dates over the past twocenturies. British trade suffered a major setback in the first half of the 20th century; as ashare of GDP, it didn’t recover to pre-World War I levels until 1970. Only in the past20 years or so has international trade become more important to the British economy thanit was in 1910. And even today international trade is far less important to the U.S. economythan it was to Britain for most of the 19th century.

What Do We Trade?When countries trade, what do they trade? For the world as a whole, the main answeris that they ship manufactured goods such as automobiles, computers, and clothing to

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Services19.59%

Mining14.18%Agricultural

6.91%

Manufactures59.32%

Figure 2-6The Composition of WorldTrade, 2005

Most world trade is in manufac-tured goods, but minerals—mainlyoil—remain important.

Source: World Trade Organization.

each other. However, trade in mineral products—a category that includes everythingfrom copper ore to coal, but whose main component in the modern world is oil—remains an important part of world trade. Agricultural products such as wheat,soybeans, and cotton are another key piece of the picture, and services of various kindsplay an important role and are widely expected to become more important inthe future.

Figure 2-6 shows the percentage breakdown of world exports in 2005. Manufacturedgoods of all kinds made up the lion’s share of world trade. Most of the value of mininggoods exported in 2005 consisted of oil and other fuels. Trade in agricultural products,although crucial in feeding many countries, accounts for only a small fraction of the valueof modern world trade.

Service exports include traditional transportation fees charged by airlines and shippingcompanies, insurance fees received from foreigners, and spending by foreign tourists. Inrecent years new types of service trade, made possible by modern telecommunications,have drawn a great deal of media attention. The most famous example is the rise ofoverseas call and help centers: If you call an 800 number for information or technical help,the person on the other end of the line may well be in a remote country (the Indian city ofBangalore is a particularly popular location). So far, these exotic new forms of trade arestill a relatively small part of the overall trade picture, but as explained below that maychange in the years ahead.

The current picture, in which manufactured goods dominate world trade, is relativelynew. In the past, primary products—agricultural and mining goods—played a much moreimportant role in world trade. Table 2-4 shows the share of manufactured goods inthe exports and imports of the United Kingdom and the United States in 1910 and 2002. Inthe early 20th century Britain, while it overwhelmingly exported manufactured goods,mainly imported primary products. Today manufactures dominate both sides of its trade.

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TABLE 2-4 Manufactured Goods as Percent of Merchandise Trade

United Kingdom United States

Exports Imports Exports Imports

1910 75.4 24.5 47.5 40.72002 82.6 80.4 82.1 77.8

Source: 1910 data from Simon Kuznets, Modern Economic Growth: Rate, Structure and Speed. New Haven:Yale Univ. Press, 1966. 2002 data from World Trade Organization.

Percent of exports

1960 1970 1980 1990 2001

70

0

10

20

30

40

50

60Manufactures

Agricultural

Figure 2-7The Changing Composition of Developing-Country Exports

Over the past 40 years, the exports of developing countries have shifted toward manufactures.

Source: United Nations Council on Trade and Development.

Meanwhile, the United States has gone from a trade pattern in which primary productswere more important than manufactures on both sides to one in which manufactured goodsdominate on both sides.

A more recent transformation has been the rise of third world manufactures exports.The terms third world and developing countries are applied to the world’s poorernations, many of which were European colonies before World War II. As recently as the1970s, these countries mainly exported primary products. Since then, however, they havemoved rapidly into exports of manufactured goods. Figure 2-7 shows the shares of agricul-tural products and manufactured goods in developing-country exports since 1960. Therehas been an almost complete reversal of relative importance. More than 90 percent of theexports of China, the largest developing economy and a rapidly growing force in worldtrade, consists of manufactured goods.

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Service OutsourcingOne of the hottest disputes in international economics right now is whether modern informa-tion technology, which makes it possible to perform some economic functions at long range,will lead to a dramatic increase in new forms of international trade. We’ve already mentionedthe example of call centers, where the person answering your request for information may be8,000 miles away. Many other services similarly can be done in a remote location. When aservice previously done within a country is shifted to a foreign location, the change is knownas service outsourcing (sometimes also referred to as service offshoring.)

In a famous Foreign Affairs article published in 2006, Alan Blinder, an economist atPrinceton University, argued that “in the future, and to a great extent already in the present, thekey distinction for international trade will no longer be between things that can be put in a boxand things that cannot. It will, instead, be between services that can be delivered electronicallyover long distances with little or no degradation of quality, and those that cannot.” For exam-ple, the worker who restocks the shelves at your local grocery has to be on site, but theaccountant who keeps the grocery’s books could be in another country, keeping in touch overthe Internet. The nurse who takes your pulse has to be nearby, but the radiologist who readsyour X-ray could receive the images electronically anywhere that has a high-speed connection.

At this point, service outsourcing gets a great deal of attention precisely because it’s stillfairly rare. The question is how big it might become, and how many workers who currentlyface no international competition might see that change in the future. One way economistshave tried to answer this question is by looking at which services are traded at longdistances within the United States. For example, many financial services are provided to thenation from New York, the country’s financial capital; much of the country’s softwarepublishing takes place in Seattle, home of Microsoft; much of the America’s (andthe world’s) Internet search services are provided from the Googleplex in Mountain View,California, and so on.

Figure 2-8 shows the results of one study that systematically used data on the location ofindustries within the United States to determine which services are and are not tradable atlong distances. As the figure shows, the study concluded that about 60 percent of total U.S.employment consists of jobs that must be done close to the customer, making them nontrad-able. But the 40 percent of employment that is in tradable activities includes more servicethan manufacturing jobs. This suggests that the current dominance of world trade by manu-factures, shown in Figure 2-6, may be only temporary. In the long run, trade in services,delivered electronically, may become the most important component of world trade.

Do Old Rules Still Apply?We begin our discussion of the causes of world trade in Chapter 3, with an analysis of amodel originally put forth by the British economist David Ricardo in 1819. Given all thechanges in world trade since Ricardo’s time, can old ideas still be relevant? The answeris a resounding yes. Even though much about international trade has changed, the funda-mental principles discovered by economists at the dawn of a global economy still apply.

It’s true that world trade has become harder to characterize in simple terms. A centuryago, each country’s exports were obviously shaped in large part by its climate andnatural resources. Tropical countries exported tropical products such as coffee and cotton;land-rich countries such as the United States and Australia exported food to denselypopulated European nations. Disputes over trade were also easy to explain: The classicpolitical battles over free trade versus protectionism were waged between Englishlandowners who wanted protection from cheap food imports and English manufacturerswho exported much of their output.

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The sources of modern trade are more subtle. Human resources and human-createdresources (in the form of machinery and other types of capital) are more important thannatural resources. Political battles over trade typically involve workers whose skills aremade less valuable by imports—clothing workers who face competition from importedapparel, and tech workers who now face competition from Bangalore.

As we’ll see in later chapters, however, the underlying logic of internationaltrade remains the same. Economic models developed long before the invention of jet planesor the Internet remain key to understanding the essentials of 21st century international trade.

SUMMARY

1. The gravity model relates the trade between any two countries to the sizes of theireconomies. Using the gravity model also reveals the strong effects of distance andinternational borders—even friendly borders like that between the United States andCanada—in discouraging trade.

2. International trade is at record levels relative to the size of the world economy, thanksto falling costs of transportation and communications. However, trade has not grown

Agriculture 1%

Mining, Utilities, Construction1%

Manufacturing12%

Retail/Wholesale7%

ProfessionalServices

14%

Education/Health0%

Personal Services2%

Other Services1%

Nontradable60%

Public Administration2%

Figure 2-8Tradable Industries’ Share of Employment

Estimates based on trade within the United States suggest that trade in servicesmay eventually become bigger than trade in manufactures.

Source: J. Bradford Jensen and Lori. G. Kletzer, “Tradable Services: Understanding the Scope and Impactof Services Outsourcing,” Peterson Institute of Economics Working Paper 5–09, May 2005.

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KEY TERMS

developing countries, p. 22gravity model, p. 14gross domestic product (GDP), p. 13

service outsourcing, p. 23third world, p. 22trade agreement, p. 17

PROBLEMS

1. Canada and Australia are (mainly) English-speaking countries with populations thatare not too different in size (Canada’s is 60 percent larger). But Canadian trade istwice as large, relative to GDP, as Australia’s. Why should this be the case?

2. Mexico and Brazil have very different trading patterns. Mexico trades mainly with theUnited States, Brazil trades about equally with the United States and with theEuropean Union; Mexico does much more trade relative to its GDP. Explain thesedifferences using the gravity model.

3. Equation (2.1) says that trade between any two countries is proportional to the productof their GDPs. Does this mean that if the GDP of every country in the world doubled,world trade would quadruple? Analyze this question using the simple example shownin Table 2-2.

4. Over the past few decades, East Asian economies have increased their share of worldGDP. Similarly, intra-East Asian trade—that is, trade among East Asian nations—hasgrown as a share of world trade. More than that, East Asian countries do an increasingshare of their trade with each other. Explain why, using the gravity model.

5. A century ago, most British imports came from relatively distant locations: NorthAmerica, Latin America, and Asia. Today, most British imports come from otherEuropean countries. How does this fit in with the changing types of goods that makeup world trade?

in a straight line: The world was highly integrated in 1914, but trade was greatlyreduced by depression, protectionism, and war, and took decades to recover.

3. Manufactured goods dominate modern trade today. In the past, however, primaryproducts were much more important than they are now; recently, trade in services hasbecome increasingly important.

4. Developing countries, in particular, have shifted from being mainly exporters ofprimary products to mainly exporters of manufactured goods.

FURTHER READINGS

Paul Bairoch. Economics and World History. London: Harvester, 1993. A grand survey of the worldeconomy over time.

Alan S. Blinder. “Offshoring: The Next Industrial Revolution?” Foreign Affairs, March/ April 2006.An influential article by a well-known economist warning that the growth of trade in servicesmay expose tens of millions of previously “safe” jobs to international competition. The articlecreated a huge stir when it was published.

Frances Cairncross. The Death of Distance. London: Orion, 1997. A look at how technology hasmade the world smaller.

Keith Head. “Gravity for Beginners.” A useful guide to the gravity model, available athttp://pacific.commerce.ubc.ca/keith/gravity.pdf.

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Harold James. The End of Globalization: Lessons from the Great Depression. Cambridge: HarvardUniversity Press, 2001. A survey of how the first great wave of globalization ended.

J. Bradford Jensen and Lori G. Kletzer. “Tradable Services: Understanding the Scope and Impact ofServices Outsourcing.” Peterson Institute Working Paper 5–09, May 2005. A systematic look atwhich services are traded within the United States, with implications about the future of interna-tional trade in services.

World Bank. World Development Report 1995. Each year the World Bank spotlights an importantglobal issue; the 1995 report focused on the effects of growing world trade.

World Trade Organization. World Trade Report. An annual report on the state of world trade. Eachyear’s report has a theme; for example, the 2004 report focused on the effects on world trade ofdomestic policies such as spending on infrastructure.


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International Economics: Theory & Policy -...

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